Facts of the Case

The petitioner, M/s Swarovski India Pvt. Ltd., filed its return of income for Assessment Year 2005-06 claiming deduction under Section 10B amounting to ₹6,34,90,243/- in respect of its 100% Export Oriented Unit situated at Pune. The company stated that it was engaged in manufacturing and processing activities involving raw beads converted into finished imitation pearls.

The assessment was completed under Section 143(3) after consideration of the Transfer Pricing Officer’s order under Section 92CA.

Subsequently, the Department issued a notice under Section 154 alleging that:

  1. Deduction under Section 10B was wrongly allowed because the petitioner was allegedly carrying out activities on “job work basis”; and
  2. Income from other sources amounting to ₹1,32,97,000/- was wrongly included for deduction purposes.

The petitioner filed detailed replies explaining that the Pune Unit was engaged in manufacturing and production activities qualifying for deduction under Section 10B.

Thereafter, a reassessment notice under Section 148 dated 23.03.2012 was issued beyond four years from the end of the relevant assessment year alleging escapement of income.

Issues Involved

  1. Whether reassessment proceedings under Sections 147/148 can be initiated beyond four years from the end of the relevant assessment year without establishing failure on the part of the assessee to fully and truly disclose material facts.
  2. Whether the petitioner had failed to disclose material facts relating to its activities carried out on “job work basis”.
  3. Whether reassessment based merely on change of opinion is sustainable in law.

Petitioner’s Arguments

The petitioner contended that:

  • The notice under Section 148 was issued beyond four years and therefore the first proviso to Section 147 was applicable.
  • Reassessment beyond four years is permissible only if there is failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment.
  • The reasons recorded by the Assessing Officer did not specify which material fact had allegedly not been disclosed.
  • All relevant details regarding the nature of business activities and job work operations had already been disclosed during the original assessment proceedings as well as in transfer pricing documentation.
  • The reassessment proceedings amounted to mere change of opinion and were therefore invalid.

The petitioner relied upon:

  • Haryana Acrylic Manufacturing Co. vs Commissioner of Income Tax & Another [2009] 308 ITR 38 (Delhi)
  • Rural Electrification Corporation Ltd. vs Commissioner of Income Tax [2013] 355 ITR 356
  • Microsoft Corporation (I) Pvt Ltd vs Deputy Commissioner of Income Tax

 

Respondent’s Arguments

The Revenue contended that:

  • The petitioner had wrongly claimed deduction under Section 10B despite carrying out activities on “job work basis”.
  • Income from other sources amounting to ₹1,32,97,000/- had escaped proper taxation.
  • The Assessing Officer had reason to believe that income amounting to ₹7,67,87,243/- had escaped assessment.

The Department further alleged that escapement occurred because of failure by the assessee to fully and truly disclose all material facts necessary for assessment.

 

Court Findings / Court Order

The Delhi High Court held that:

  • Mere escapement of income is not sufficient for reopening assessment beyond four years.
  • The Assessing Officer must clearly establish failure by the assessee to disclose fully and truly all material facts necessary for assessment.
  • In the present case, the assessee had specifically disclosed that the Pune Unit was carrying out activities on “job work basis”.
  • The Transfer Pricing Report and replies during assessment proceedings clearly described the manufacturing and processing activities undertaken by the assessee.
  • The records demonstrated complete disclosure of all material facts by the petitioner.
  • Therefore, the allegation of failure to disclose material facts was contrary to the record.

Accordingly, the Court quashed:

  • Notice dated 23.03.2012 issued under Section 148; and
  • Order dated 25.02.2013 rejecting objections of the assessee.

The writ petition was allowed in favour of the assessee.

Important Clarification

The Court clarified that:

  • Reassessment after expiry of four years from the relevant assessment year is permissible only where there is a specific and demonstrable failure by the assessee to fully and truly disclose material facts.
  • Merely reproducing statutory language without identifying the alleged non-disclosure is insufficient.
  • Where all primary facts are already available on record, reopening of assessment amounts to impermissible review or change of opinion.


Link to download the order -Delhi High Court Judgment PDF – M/s Swarovski India Pvt. Ltd. vs Deputy Commissioner of Income Tax

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